The Indian rupee slump gained steam this week as the USD/INR exchange rate rose to a record high of 84.91. It has risen by over 2.7% from its lowest level this year and almost 20% in the last five years.
Potential India interest rate cut
The USD/IDR exchange rate has soared as investors anticipate an interest rate cut in the next few meetings. Hopes of a cut increased after the government replaced the relatively hawkish Shaktikanta Das as the central bank governor. He was replaced by Sanajay Malhotra, the Finance Minister.
Analysts believe that Narendra Modi replaced Das for his hawkish tendencies. Unlike other central banks, the RBI has emerged as one of the most hawkish this year. It has refused to cut interest rates, a move that it has defended citing the rising inflation rate in the country.
The most recent data showed that the headline Consumer Price Index (CPI) slowed from 6.2% in October to 5.48% in November. Still, that CPI figure was higher than the year-to-date low of 3.54%.
Analysts believe that India’s inflation rate will remain above 5% for a while because food prices remain stubbornly high. Despite this, the market anticipates that Malhotra will cut rates as soon as in January because of the ongoing economic softness.
Recent economic data showed that the Indian economy slowed in the third quarter. It expanded by just 5.4%, missing the median estimate of 7%. Therefore, India will likely not meet its 7% growth target, a move that has partially been blamed to higher rates in the country.
The indian rupee softness mirrors that of other emerging market currencies. For example, the Indonesian rupiah has slumped to 16,100, its lowest point since August. Similarly, the South African rand, often seen as a bellwether for emerging markets, dropped to 18, its lowest level in weeks.
These emerging market currencies have fallen because of the recent Donald Trump election and its potential implications. Trump has vowed to deport millions of illegal immigrants and impose large tariffs on imports.
Federal Reserve rate cut
The USD/INR exchange rate has also continued rising ahead of the upcoming Federal Reserve interest rate decision.
Economists expect that the bank will slash rates as it continues to engineer a soft landing for the economy.
It has already slashed rates by 0.75%, and experts see it cutting by 0.25%, bringing the total cuts this year to 1%. The Fed is cutting rates in a bid to boost spending and improve the labor market as the unemployment rate has risen to 4.2%.
Still, the Fed is also more concerned about inflation, which has remained stubbornly high. Recent data showed that the core inflation, which excludes the volatile food and energy prices remained at 3.3%, much higher than the 2% target.
The Fec is also concerned that some of Donald Trump’s policies will stir inflation in the country. It cites the upcoming tariffs, which will increase the prices of most items in the country.
USD/INR technical analysis
The weekly chart show that the USD to INR exchange rate has been in a slow uptrend in the past few years. Most recently, the pair has risen in the last seven weeks after the change in India’s central bank.
The pair has jumped above the upper side of the rising wedge chart pattern. A wedge is made up of two ascending trendlines that concierge.
Also, oscillators like the MACD and the Relative Strength Index (RSI) have continued rising. Therefore, the pair will likely stabilize around the resistance at 85. A strong bearish breakout cannot be ruled out in 2025 because of the wedge chart pattern.
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